Diversification Helped TDFs in 2012

“[T]he funds’ highly diversified nature … gave the offerings an additional edge last year,” noted Josh Charlson, senior fund analyst with Morningstar. Charlson pointed out that although the more aggressive tendencies of some shorter-dated funds produced severe losses in 2008, all but one of the currently extant 2015 funds have recouped their losses, and most have produced double-digit positive gains.  

The target-date categories for investors at least 20 years from retirement (dated 2035 or later) produced average calendar-year returns of 14.7% and higher.  

The average return of funds in the target-date 2011-2015 category was 10.7%. Those funds have an average strategic allocation to stocks of 52%, but the Barclays U.S. Aggregate Bond Index brought in only a 4.2% gain last year. According to Charlson, diversification into areas such as high-yield bonds, Treasury Inflation-Protected Securities (TIPS) and, in some cases, emerging-markets debt pushed returns ahead. “With high-yield bonds last year producing returns on par with those of the stock market, many target-date funds got some extra juice from their fixed-income sleeve,” Charlson said.